), who expects shares of leaders to rise between 50% and 75% by late 2006 even if earnings growth slows.
Caterpillar Inc. (CAT
) may be the best bet to bulldoze ahead. Although its shares have tumbled 9% this year, the world's biggest maker of earth-moving machinery reported record first-quarter sales and earnings in April. Management says it expects this to be the best year in the company's history. Earnings could jump 69% in 2004 and an additional 22.5% in 2005 on the back of orders for its construction machines, truck engines, and mining equipment, says analyst Elias Lustgarten of brokers J.B. Hanauer & Co. in Parsippany, N.J. If so, the shares could hit $110 in the next year, vs. $76 now.
Traditional late bloomers focused on heavy equipment and commercial construction also look set to flourish. Diversified manufacturer Ingersoll-Rand Co. (IR
) gets 45% of its business from markets that typically recover late in the economic cycle, according to analyst Joanna Shatney of Goldman, Sachs & Co. (GS
). She expects Ingersoll-Rand's earnings to rebound 36% in 2004 and an additional 23% in 2005. That could translate into a 41% rise in its share price over the next 18 months.
Count on two other heavy-duty manufacturers to catch up to the recovery. Cleveland-based Eaton Corp. (ETN
) could enjoy earnings growth of 46.5% this year and 19% in 2005 as customers start buying more truck transmissions for big rigs and industrial gear such as hydraulic equipment. That could hoist shares to $83 within a year, from $61 now, according to Lustgarten. And look for Illinois Tool Works (ITW
) shares to climb over the next 12 months. The reason: a 25.5% advance in earnings this year and 28% more in 2005, predicts analyst Ann Duignan of Bear, Stearns & Co. (BSG
Smaller, niche players in the sector also promise outsize returns in the year ahead. Case in point: Oshkosh Truck Corp. (OSK
), with $2 billion in revenues last year. Buoyed by strong sales of its military trucks and emergency vehicles during the downturn, the Oshkosh (Wis.)-based company managed to post double-digit increases in sales and profits. Now orders are starting to come in for its garbage trucks and concrete mixers. So analyst Robert F. McCarthy Jr. of Robert W. Baird & Co. in Chicago figures that Oshkosh will post a 38% increase in profits for the year ending Sept. 30 and 20% next year. His target for the next 12 months: $67 a share, up 26% from $53 now. Call it a capital idea in capital goods. By Michael Arndt in Chicago